XP Inc. Q4 FY2021 Earnings Call

So good evening, everyone, or good afternoon, depending on where you are at. Welcome to another conference call or earnings call for XP Inc., this time around for the fourth quarter of 2021 or for the whole year of 2021. I am André Martins. I am responsible for Investor Relations at the company. We also have with us today our CEO, Thiago Maffra; and also Bruno Constantino, our CFO; together with the IR team, Marina and Antonio as well. So just before we begin, again, always refer to Page 2 of our presentation to read the disclaimers, right? And some comments on forward-looking statements, okay? Anything that regarding the forward-looking statements and how actual results may differ from them can be found in the SEC filings on our IR website. So once again, thank you so much for your interest. We have a translation to Portuguese on this call. You just use the tool in the Zoom app. And for Q&A, I can see that we already have five raised hands, so whoever wants to participate in the Q&A after the initial presentation, please raise your hand on the Zoom link, and we can address your question and you can talk to the management. So before I pass the word to Bruno, we will show a quick video just to summarize how the year of 2021 happened, what were the main milestones and so forth. So just a quick video before we begin. Thank you. Okay, great. So that was our short video. Bruno, please, the floor is yours.

Thank you very much, André. Hi, everyone. Good evening or good afternoon. It’s a pleasure to be with you again for another earnings call. I'll be presenting today and I'll keep it brief, as I know there are many questions for the Q&A session. Maffra, our CEO, will join me for that portion. Since we're discussing the full year results for 2021, two years after our IPO in 2019, I want to share a few thoughts. The word remarkable truly describes last year. It was an exceptionally strong year in every aspect we can measure, including financial performance and growth, but especially in terms of the investments we've made in the company. We've added over 2,500 new employees and have been developing new products, which you’ll see in the presentation. We're genuinely pleased with last year's accomplishments but acknowledge there is still much to achieve moving forward. If you haven’t read Maffra's letter in our earnings release, I highly recommend it. It conveys a lot about the entrepreneurial spirit we embody at XP, rooted in our history since Guilherme Benchimol founded the company in 2001. For us, entrepreneurship means continuously improving customer experiences, alongside sustainable financial results. In a time when capital is abundant and entrepreneurship is booming, we remind our teams that excelling in business is achievable, but the challenge lies in doing so while maintaining strong financial metrics. In 2021, we expanded our workforce significantly and continued investing in new business areas such as pensions, credit, credit cards, and insurance, leading to a year-over-year increase in SG&A of over 54%. Despite these investments, our adjusted net income surpassed BRL 4 billion, a remarkable 76% increase from the previous year. Comparing this to our adjusted net income at the time of our IPO in 2019, it’s nearly four times greater. As for 2022, we expect challenges with elections in Brazil, rising interest rates, and more. However, we remain committed to our entrepreneurial journey, continually growing revenues, managing costs effectively, and enhancing customer experiences. Now, I’ll move on to the presentation which consists of a few slides. Our first slide reviews our IPO journey, highlighting our commitment to accountability. During our IPO roadshow, we opted not to provide any guidance, which was initially recommended by our investment bankers for a high-growth company like XP Inc. We believe in long-term thinking; issuing short-term guidance can lead to sticking to expectations which does not align with our management philosophy. Nevertheless, we provided long-term guidance, forecasting a total gross revenue growth of over 35% and an adjusted net margin of 18% to 22%. In 2019, we reported total gross revenue of BRL 5.5 billion, which means with the 35% compound growth over two years, we anticipated reaching BRL 10.5 billion in gross revenue for 2021. In fact, we delivered BRL 12.8 billion, reflecting a 52% compound annual growth rate instead of just 35%. When we examine the adjusted net margin and the mid- to long-term guidance, aiming for the upper limit of 22% at the time of the IPO, it results in a projected adjusted net income of BRL 2.1 billion. However, we achieved a net income of BRL 4 billion, which is significantly higher. These figures represent the results from two years. The key takeaway is that this is a long-term endeavor, and we owe it to our investors who participated in our IPO and believe in our vision. Moving on to the fourth quarter and yearly numbers, I want to share some recent developments that we've included in our presentation due to frequent inquiries. Regarding the digital bank, many have asked when it will be ready. I am pleased to inform you that it's already operational and is my primary banking choice. We currently have around 150,000 digital account users, and it offers a fully integrated experience that allows for everyday bill payments and transfers between XP accounts, with Pix functioning seamlessly. We've implemented features like automatic debit, payroll portability, and QR code deposits. While it's not entirely complete, we are at 67% completion, and we anticipate being over 90% complete by the second half of this year, aiming for full operational status in 2022. The next point is about our Life Insurance launch, which is a new business with significant growth potential. We began conceptualizing this product in the fourth quarter of last year, and after just under four months, we launched a fully integrated life insurance experience in our app in January this year. It's designed to be transparent with no hidden costs, and users can complete it quickly with just three clicks. These examples illustrate how we plan to expand our core business of investments while enhancing our service offerings. Now, let’s discuss the fourth quarter’s KPIs and financials. On the left part here, we have the gross revenues, BRL 3.4 billion in the quarter, a record in our history. 34% growth year-over-year, a gross profit of BRL 2.4 billion, 52% growth year-over-year. We also present higher gross margin since our IPO in this quarter. An adjusted EBITDA of BRL 1.4 billion and adjusted net income, as we said, BRL 1.1 billion, a 51% increase, with an adjusted net margin greater than 33% in the fourth quarter of '21. When we look at the KPIs on the right part, you have seen that already. We have released in our press release, investment AUC as the main KPI, BRL 815 billion by December. Our pension AUC, it’s considered in those BRL 815 billion. It was BRL 48 billion; we have that number, not only our own insurance company, but also third parties that go into our marketplace and benefit from our distribution capability altogether, BRL 48 million by December, a 51% growth year-over-year. In the credit part, we started in 2020 a small credit amount; we ended the year 2020 with BRL 3.9 billion of portfolio, huge growth and by the end of last year, more than BRL 10 billion, a 164% growth year-over-year. And the credit card, the TPV, BRL 4.4 billion, more than BRL 1 billion per month and growing in the fourth quarter of '21. And also the NPS, the main KPI that we keep on track to understand if we are going in the right direction for our clients, 76, a strong number as well. In this Slide 10, we have the total revenues and the retail revenues. Retail revenues accounted for 79% of total revenue. We lost relevance of Issuer Services and Institutional in comparison to Retail, not only because of the high growth of the Retail business, especially with those new businesses that they are mainly Retail businesses, but also at the Issuer Services, we had a good quarter in DCM, but the equity capital markets suffered because of the macro environment. And Institutional, we had a growth, but not a strong growth as we had in Retail. So the relevance increased. When we look at the contributions, the new verticals, we are going to talk more about it, and fixed income products as well that benefit from the high interest rates. We included this slide, which was presented during our Investor Day in December last year. This slide shows the SELIC rate, which was around 14% in 2015 and 2016, decreased to nearly 2%, then increased to 10.75% and is expected to approach 12%. The green line represents the ratio of the last 12 months' revenues of fixed income plus floating divided by equities in futures. When the SELIC rate decreases, this ratio also declines because the equities and futures benefit from the positive impact of lower interest rates, reflecting the equitization process in Brazil, making them more significant compared to fixed income and floating. Conversely, when interest rates rise, equities and futures are negatively affected, while fixed income and floating gain from higher rates, causing the green line to rise. This ratio is based on the last 12 months of data, whereas the SELIC rate is a single data point, serving as a leading indicator for future movements of the green line. During our Investor Day, we noted that revenue growth in the third quarter was 28 times greater than the last 12 months of 2015, and with one additional quarter, it increased to 31 times. Thus, even with the SELIC rate rising, revenue growth remains strong. Retail revenue and the new verticals. Because retail revenue, I'm only going to make two comments here. Number one is the take rate. As you know, it's an output of a math equation; retail revenue is divided by average AUC. But what is interesting to note is, since our IPO in 2019, every quarter, if you look at the take rates, retail revenues divided by the last 12 months, retail revenues divided by the average AUC for the last 12 months, 1.3% has remained intact. The mix has changed a lot, but that's the number, and it’s flat. And we have forfeited more than probably BRL 200 million of revenue per year when we decided back in 2020 to zero online brokerage commissions at the Rico brand and reduced by 75% at XP brand; Clear's brand was already zero. And despite all of that, it’s 1.3%. One of the reasons is the new verticals that I'm going to talk about right now. But another reason is this portfolio effect that when we think about investments, depending on what the macro environment is, you're going to change your portfolio allocation, but you still have opportunities in terms of investments. Now talking about the right part of this slide, revenues from new verticals. That's a promise we have made in our Investor Day. So here it is: Pension funds, credit cards, credit, and insurance. In the fourth quarter of '20, all those four new businesses combined, they represented less than 2% of total revenue. You fast-forward a year, in the fourth quarter of '21, the relevance of those new businesses combined went up to 6.5% of total revenue, with a growth year-over-year of 387%, very strong growth. Now we are going to talk about each of them, so you can see that the growth has been impressive. Of course, the base is also low because they are new businesses. But the potential, looking forward, is still amazing. We are at a very early stage in each of those new businesses. Let's discuss pensions. We only offer private pensions, specifically from our own insurance company, which we launched as a startup in 2019. Two years in, we had just over 6% of the market share for net new money in pensions from our insurance company. Fast forward to last year, and we captured more than 50% of the market share, making us the leader as noted in reviews. However, when looking at our total market share in assets under custody, we stand at just 3%. This is significantly less than the main competitors who hold over 20% to 25% market share, indicating that we still have considerable room for growth. Transitioning to credit cards and total payment volume, we are currently referencing third quarter data since we haven’t received the full fourth quarter statistics from the Central Bank yet. In the third quarter, our new product had a 0.5% market share, and while we anticipate an increase in the fourth quarter, it does not substantially alter the overall scenario. Even with BRL 10 billion TPV for all of 2021, we only officially launched our credit card for three quarters. Recently, in December, we reduced our investment threshold to BRL 5,000 at XP brand. That's another important information. When you look at the 3.4 million clients that we have at XP Inc., it's only a portion of that number that is considered eligible today to have our credit card. We don't have it at the Rico brand. We don't have a Clear brand today. So only in-house, there is a great potential for growth in the credit card business. Now let's talk about credit and then insurance. Credit, it’s hard to put a market share here because we are almost creating a market when we talk about collateralized credit with investments. It's a non-existing market in Brazil, and we innovated there in scale. And we went from nothing to BRL 10 billion credit portfolio really fast. In terms of percentage of our assets under custody, in 2020 it represented 0.6%; by the end of last year, 1.3%. And most importantly, 0 NPL. What that means? Very good credit quality because we have the right clients, the investor clients in the sense that from a credit perspective, it's really good credit quality. Now, when we go to insurance, we see lesser growth here, but that's a brand-new product that we just launched in January of this year. So this business, we believe, has maybe one of the greatest potential. And here, we are talking about two verticals of insurance: we are talking about a marketplace; and we are talking about our own insurance company winning policies for life insurance. When we look at our own insurance company, it's nothing in 2021. So we are going to start this basically this year. When we look at the marketplace, it does exist for a longer time. We do have a broker insurance company for a while. But when we think about other insurance products, everything is new. Auto insurance, health insurance, all of that, they are products that our clients want to consume through our app, through our platform that we did not offer to our clients and we are going to offer it right now. So the market share is relevant 0.1%, nothing, and we are going to aim high here as well. Moving forward for the financials, the adjusted EBITDA, looking at the right part of the chart, the adjusted EBITDA went up from BRL 891 million in the fourth quarter of '20 to BRL 1.4 billion in the fourth quarter of '21, a 56% increase, increasing the EBITDA margin from 37% to 42.7% approximately. When we look at the operating expenses, you can see an increase year-over-year of 38%. But on a quarterly basis, it's tricky. I'd rather see it on a full-year basis. On a quarterly basis, you have a reduction in the fourth quarter, mainly because we do have some incentives that we received from third parties. We have had that in all the years since our IPO in 2019, 2020, and 2021. We expect to have this year as well, 2022. And the main components there in 2021 were Visa incentives and B3 incentives as well. But we do have more than that. So that's why when you look at a quarterly basis, it’s a little bit tricky. I would look at the whole year in terms of operating expenses. Now moving to the next slide, adjusted net income, a record quarter, BRL 1.086 billion of adjusted net income with a 33.3%, as I have already said. And when we look at the whole year, it’s four times two years before 2019, the IPO year, a 76% growth year-over-year. And finally, last slide, I promise. Here, we put this slide because we also get a lot of questions about the effective tax rate. Is it sustainable or not? What happens there? You guys seem to present a very low effective tax rate. But that's tricky because that's what the IFRS tells us to show in our financials. But at the end of the day, we pay much more tax. And that's exactly what we try to put here; you have this profile managerial income statement in our earnings release. You had already in the third quarter, but we decided to bring it to the earnings presentation, so everyone here can see. Basically, what we have here? Looking at the column of the fourth quarter '21, you go down to taxable equivalent adjustment. What is that? The BRL 157 million that you can see there. That's the tax paid at our investments that the revenue associated with this tax, it's recognized in our total revenue, net of the tax. That's because it's done through funds, and that's the way it has to be recognized. But at the end of the day, the tax does exist, and we pay that. So what we did here, we added the tax to the earnings before tax. And then we also added the tax to the tax expense. It's a tax expense normalized; that's the BRL 287 million. And when we do the math, you’re going to see that in the fourth quarter '21, our effective tax rate was 22.5%. In the whole year of 2021, it was 18%. This number can vary from 15% to 25%. So a larger spread here, basically because it depends on the revenue mix that we are going to get. If we have a lot of, for example, offers, hot equity markets, probably the effective tax rate is going to be higher. If the full business is the one that benefits the most, the opposite way around, because it’s a lower tax business. So it depends on the mix. But the main point here is the effective tax rate is not 6%, 5%, it's more like 20%, 25%. With that, I end my presentation. Thank you one more time for the interest, and let's go for the Q&A.

Great. Bruno. Once again, we have many participants raising their hands. The first participant is Mr. Tito Labarta from Goldman Sachs. Tito?

My question is about the retail revenues. AUC increased by 23%, and retail revenue rose by 48%. You highlighted the advantages of the new products, which you expect to invest around BRL 10 billion by 2025. Additionally, you mentioned in the press release that it benefited from higher rates. Is that still a favorable factor? How much more do you think you can benefit from rising interest rates? I'm trying to understand how that revenue might grow in 2022 in a higher interest rate environment. This indirectly relates to your take rate, but I'm looking to grasp your perspective on this, as the growth has been strong despite AUC growth being much lower.

Do you want me to take, or do you want me to start? Maffra, it's your call here. I can...

I can start, but it's amusing that you ask that because a few months ago we were getting the opposite question. With the interest rates rising, people were concerned about what would happen to our revenues. As Bruno mentioned, we have a robust ecosystem and a diverse portfolio of products, some of which benefit from high interest rates and others from lower rates. We can grow in any economic environment because it's more about specific micro factors rather than macro ones in Brazil. Our market remains highly concentrated, with around 85% of revenues and investments tied up with the five largest banks. Therefore, high interest rates do not necessarily mean we will grow less, and the same goes for low interest rates. We've been sharing this perspective with investors for several months, and that is what we observe.

It's a resilient business model, Tito. It's difficult to pinpoint the growth rate. As I mentioned earlier, we do not provide annual guidance. Our focus, like our main investors, is on the long term. Last year was challenging as well; the first half saw strong performance in equities and trading activity, but the second half, particularly the fourth quarter, showed a significant decline in daily average trades compared to the first quarter, roughly a 25% drop. Nonetheless, we managed to navigate this challenging environment, which certainly affected the equity segment of our business. However, we successfully mitigated that impact through other areas. Ultimately, our focus is not on selling a specific product but on building deep, long-term relationships with our clients. Our core business revolves around investment, which requires continuous consideration of portfolio management and allocation, regardless of the macroeconomic climate, and that is the essence of our business.

Great. Just one follow-up on that revenue. At the Investor Day, you mentioned BRL 40 billion in revenues by 2025. Do you still feel comfortable with that? Also, while I know you don't want to provide annual guidance, could you share your thoughts on a two-year outlook? Do you expect that trajectory to remain fairly steady? Similar to the IPO, do you see any potential upside? How conservative do you think that outlook is moving forward?

Tito, we are never comfortable, okay? Because we always have like one of our key values is big dreams, okay? So we always have very challenging, like dreams and goals for the team.

We aim high, right, Maffra?

Yes, we are never comfortable. If things become too easy during our journey, we will definitely raise our internal goals. It's always a challenge for us to surpass our internal targets because we have ambitious aspirations. We prefer individuals who set achievable goals and reach about 60% to 70% of them, rather than those who set weaker goals and exceed them by reaching 150%. This is our approach. While we may feel unsettled, we are committed to putting in every effort to exceed the goals we have set for ourselves.

And your first part of the question, yes, I mean, we gave that guidance a month ago, right? It sounds like that, a little bit more than a month ago. Nothing changed. And you saw the total revenue of those four new businesses, they represented 6.8% of our record gross revenue in the fourth quarter. Our long-term guidance for those all four businesses combined by 2025 is to represent 25% of total revenue. They’re going to get traction in relevance for sure. The slope of the growth will depend on manufacturers. So we are going to share the results with all of you each quarter, no matter what the results are, okay? Either good or bad, we are going to share.

I want to point out that in insurance, we have 0.1% market share and in pensions, we hold 3%. Even if we reach BRL 40 billion, that would represent only about 3% of the total revenue in Brazil's financial market. This still reflects a very small share since we are talking about BRL 800 billion in total revenue today within that market. BRL 40 billion is insignificant because the market is projected to grow to a trillion by 2025, which would then result in a 4% market share. So, it's not substantial.

Congratulations on the strong quarter.

Thank you, Tito. So next is Jorge Kuri from Morgan Stanley.

Congrats on the numbers. Great quarter. Let me ask you about your margins, which are pretty impressive, a 400-basis-point increase in EBITDA margins year-on-year, if I look at the full year 2020 versus 2021, and a 500-basis-point increase in your adjusted net margin. Given the significant investments that you made during the year to grow the IFA network, to grow the new businesses, it's very surprising to see these very attractive margin expansion. Where are we in that process? How much can you continue to grow those margins? Is it the right thing to grow the margins and not maybe put more money in the business? How should we think about what's doable or not doable over the next couple of years in terms of margins for your business?

We have invested heavily in the business, and we plan to continue doing so. When investors ask about dividends, we emphasize that we are focused on high growth with exciting opportunities. We believe the best strategy is to reinvest all of our profits into expanding new ventures. Given the strong returns we observe in Brazil's financial industry, which is quite concentrated, our long-term guidance since the IPO remains unchanged at between 24% and 30%. We anticipate significant growth, particularly in hiring for these new businesses, with hiring peaking in 2022. The headcount growth we experienced last year, which was nearly 70% year-over-year, is expected to decelerate in 2021. We are moving past the peak in terms of hiring, which creates a carry cost as we cannot hire everyone at once, and personnel costs represent our main expense. We observed a peak in growth in 2022. If we assume everything else remains unchanged, we should expect to see operating leverage starting to take effect from 2023 onward. However, we also have new businesses that come with varying margins, which will affect the overall performance. For instance, in our credit card segment, the primary source of revenue is interchange fees, along with foreign exchange. The revolving credit aspect is less significant for our client base, and we also invest 1% back into our cost of goods sold. Additionally, rapid growth in the credit card sector requires us to adopt an accounting policy that necessitates estimating non-performing loans, even if we believe a client will not default, which must be reflected in our financials and can impact revenues. Therefore, while the growth in credit cards might depress certain rates, the increased headcount growth will likely lower our rates as well, but the operating leverage from more established businesses should enhance the company's overall operating margins.

I was going to say that, but we're glad you said it.

Internally, we don't believe we can just sacrifice 300 basis points of EBITDA margin to speed up investment growth, as we are already doing that. The key point is that we are making significant investments, but it's not simply a matter of spending more money. The real challenge lies in execution and understanding the product in collaboration with our clients so that we can develop it further. This process requires time, and there is a specific timeframe involved.

Another way to say that, Bruno, is that we hired 2,500 people last year, which is a significant number. We can't hire more people at once because it's not feasible to bring in additional staff immediately. Instead, we should focus on investing in building new business lines. We have been developing dozens of new business lines and products over the past year, so we are experiencing rapid growth. If you look at the numbers, we're experiencing growth of 50% to 60%, and in some new business lines, it's even in triple digits. So we are growing and it's happening quickly. It's not just about investing more. As Bruno mentioned in the letter, we prefer to grow profitably. We're not focused on simply increasing our client base for the sake of showing growth, as that doesn't align with our strategy. We've structured our approach to ensure we're growing rapidly while maintaining profitability. This is our strategy, and we expect to continue growing at a similar pace for many years to come. It's a long-term investment and mindset for us.

Next question is from Thiago Batista from UBS.

So I had one question about the credit card business. A couple of months ago, XP reduced the threshold of credit card to BRL 5,000. If I'm not wrong of investments next peak... In December.

In December, yes. Can you give us the first impression of this process, how was the set up of the clients with this card for this type of clients? Clearly, those guys are kind of mid-income individuals, not, let's say, high income as they did in the previous threshold. How was the first impression of this business for those types of clients?

You want to take Bruno, you can take. I can take care. Yes.

How can I answer that? We just released in December, so it's very new. Today, we sell the credit cards entirely online. When we look at the penetration, it's close to 35%, 40%, or 45%, depending on the aging of the cohorts. Everything is 100% online. For credit cards with a limit of BRL 5,000 and above, it seems to be even stronger since we've only been operating this new product for about a month and a half. We have a sample size of about 20,000 to 30,000 with data from six months. The most impressive aspect is the NPL, which is very close to 0.4. For those BRL 5,000-plus cards, we have collateral, which brings it even lower, essentially to 0. It appears that this will be a very good fit because typically in Brazil, to have a card with these kinds of benefits, you need to be an affluent client with BRL 200,000 to BRL 300,000 at the large banks, or else you face excessive fees. So I believe this will be a solid strategy for this segment.

Another interesting point about our credit card is that when it becomes available for someone, it simply appears in the app. We don't aggressively advertise our credit part yet. The product is developing on its own, evolving and improving to meet the basic needs of our clients, and that’s how it looks.

The key aspect of our credit card, checking account, and banking services is the underlying thesis. Currently, we capture about 50% of the clients' investment wallets. If we could achieve 100% share of wallet, we would significantly grow the company. We've inquired with clients why they do not have 100% of their business with us, and the feedback indicates they require services that we have yet to provide, leading them to maintain accounts with larger banks in Brazil. Over the past 10 months, we've observed that heavy users of our banking and payment products show a considerable increase in their share of wallet compared to casual users. This reinforces our thesis. Furthermore, our credit card product is profitable, and as we enhance our ecosystem, we expand our share of wallet, showcasing the advantages of the banking services we are developing.

Congratulations for the results.

So Otávio Tanganelli from Bradesco BBI is the next question. Otávio?

Congratulations on the results. You mentioned in the press release that the mix of products positively impacted gross margins. With higher interest rates and considering the slide you presented, it seems we may continue to see contributions from revenue sources that typically have lower commissions. What is your outlook on margins? Can we expect to achieve higher sustainable gross margin levels than what we experienced in the past?

No. Honestly, I wouldn’t say that. It can happen, of course, but I wouldn’t say it's the base case. I would say that the mix of the fourth quarter, if it continues, you should see it pretty much the same type of margins we presented in the fourth quarter. But again, that's not guidance because there is volatility in our margins depending on the mix of products. As you mentioned, for example, when you compare equities and fixed income, the commissions for equities are higher than fixed income. So if equities go down and fixed income goes up, this balance only in terms of the COGS in the gross margin would have a positive impact. So I would say that I wouldn't say that you should expect gross margins going up from the level of the fourth quarter, but it can happen.

Mario from Bank of America. Mario, can you hear us?

Is he on mute? Are you on mute, Mario?

So perhaps he is having some connection problems. Mario, please send us a message if you want to talk, and we can put you back on. Geoffrey from Autonomous.

I wouldn't say that you should expect gross margins to increase from the fourth quarter level, but it is possible.

Can you guys hear me?

Yes.

Yes.

You had a pretty big benefit. My number shares are up estimated about BRL 200 million in the bottom-line or so. Coming from a revenue that you book in other operating income, specifically, it's something that needs to be clarified of B3 rebates. I think you mentioned Visa. Nine months it was tracking BRL 111 million; in 4Q it went to BRL 360 million, implying BRL 250 million in the last quarter. My questions are twofold. Number one, kind of what's the breakdown of the B3 versus, if you want to pack it Visa and others in a separate group, ballpark, 50-50, 80-20. As I understand, this was pretty much only B3 in the past. And number two, which ones are recurring? We always assume that B3 was recurring. I mean, they changed the goals, but they keep rebating. Should we assume Visa and others are recurring in the future as well?

Sure. We cannot disclose the numbers because of contract issues about incentives that we get. But what I can tell you to help answer your question, Domingos, is B3 is more recurring than Visa. But we had Visa in 2020; we had Visa in 2021; and probably we're going to have in 2022 as well, right? And there is a seasonality in those numbers. Usually, they occur heavily in the fourth quarter compared to the other quarters. So you should not expect that on a quarterly basis to be repeated in the first, second or third quarter this year, but in the fourth quarter, yes. And if you look, as I said in that slide of the adjusted EBITDA and the operating expenses, and you look on a yearly basis, that I prefer to dilute the impact, on a yearly basis, in 2019, we have that line to 2020 and 2021; we probably are going to have in 2022. There is volatility in terms of the magnitude. But yes, we do expect that to be recurrent somehow.

And Bruno, just a quick one. You're right. Year-on-year, it didn't grow as much, but like it was unusually strong this quarter. Any reason for having this bigger seasonality this year?

No. Basically, the main impact of seasonality this year was more about Visa than B3 that I can tell you. And that's because of launch agreements that we have in our contracts that again, I cannot give you the specifics of the contract.

We had the same seasonality last year. I mean...

Last year as well.

Yes, it was BRL 150 million versus BRL 250 million in the last quarter. So it was bigger this year, and this is...

Yes. Yes. The access to XP distribution capability, it's become more expensive, I would say.

Marcelo Telles from Credit Suisse. Good night, Telles?

Can you hear me well?

Yes.

I have two questions. For the first one, I want to explore the evolution of your core performance during the quarter, following up on Domingos' question. If we look at the line for other operating expenses, it was approximately BRL 233 million for the quarter, and for the year, it totaled around BRL 266 million. This suggests a normalized level of about a quarter of that amount. However, it appears necessary to deduct around BRL 140 million from your adjusted profit, which could result in a 10% decline in your earnings compared to the third quarter. Additionally, we need to consider the effect of incentives on a quarterly basis. When examining your accounting income statement and the development of your core business revenues, it's evident that the service revenue we report is growing quarter-over-quarter, yet total revenue growth was around 3%. It seems that this growth primarily stemmed from lower mark-to-market losses compared to the third quarter. This indicates that your core business appears to be declining when compared to the third quarter. I would appreciate your insights on this decision.

No, it was not provisions. When you examine the accounting standard, you will find it in our financial notes, likely around note 28, which discusses total revenue and income with different segments. This includes net revenues from services provided, such as brokerage, stop-loss risk, and placement fees. All placement fees, along with insurance, management fees, and the funds platform, are included, representing roughly 50% to 55% of the total for the year. Additionally, net income from financial instruments has two accounting methods—through profit and loss and amortized at cost. I strongly suggest, Telles, that you analyze both together. The reason for this is that in our float business, we manage risk by hedging as much as possible. While we may not achieve a perfect hedge, we attempt to cover most of our exposure. Derivatives used as hedging instruments reflected in profit and loss follow a mark-to-market approach, while an underlying asset being hedged, recognized at amortized cost, is reported differently. However, both contribute to the net income from financial instruments, which, importantly, we stated in our presentation that 88% of this figure in the fourth quarter was from retail activities. This trend has been consistent over time, and that revenue portion has been growing due to an increase in clients and market activities in Brazil. Additionally, floating income is included in that revenue line, which benefits from higher interest rates. There was a notable increase in the fourth quarter due to rising interest rates compared to previous quarters. I hope this clarifies the situation.

Yes, that's clear. I think it's very much understood that you are earning more financial revenues while managing your own cash a bit. However, in terms of services, they are decreasing and you are somewhat focusing on that against the backdrop of higher rates. The breakdown of your revenue seems to indicate a shift towards more revenue generation.

Yes, the fourth quarter was not a good quarter, particularly regarding equity capital markets. In the REITs market in Brazil, we are the leader, but the distribution of REIT products in the fourth quarter was disappointing. Management fees and performance fees, which are typically stronger in the fourth quarter due to the fund industry's performance on our platform, also underperformed. In 2021, the performance fees were similarly lacking. Consequently, the revenues from REITs, equity capital markets, and performance fees decreased in the fourth quarter due to market conditions. However, we more than compensated for this with other revenues, most of which contributed to net income from financial instruments.

So indeed, Mario, we couldn't hear him, but he sent us two simple questions. The first one is why other revenues declined. I thought that since the cash is higher and also the SELIC, that revenue should benefit. That's the first. The second is about commissions, which are decreasing as a percentage of retail revenues. Otávio mentioned that in his question, and Mario wants to understand the future dynamics because we signed long-term agreements with the IFA network through prepaid expenses. Perhaps some in the market anticipated that those revenues or expenses would be higher as a percentage of retail revenues, but they are lower. So he's inquiring about the dynamics. These are the two questions.

In terms of other revenue, we have interest on adjusted gross cash along with our asset liability management results. We maintain a hedge policy to cover up to 50% of our floating balance. Hedging allows us to mitigate the risk of income by fixing rates, but when fixed rates rise, as they did in the second half of the year, it negatively affects our results. This is why other revenues are lower than expected. Regarding the second question about the IFAs, is it related to the impact on the cost of goods sold?

Yes.

We have seen the impacts, which might differ from your expectations. It's not related to the prepaid expenses from our long-term contracts with the IFA network; rather, it stems from the product mix. The commission decreased due to the revenue mix from the IFA channel, which likely accounts for the discrepancy. All prepaid expenses are amortized over the duration of the contracts with each IFA.

Great. Thank you, Bruno. So the next question probably we'll have two more. Gabriel Gusan from Citi.

Can you hear me?

Yes.

Great. My question is also about the prepaid expenses. We're seeing it at almost BRL 4 billion right now, increasing around BRL 500 million just in the fourth quarter. And getting more and more questions from investors about that. When will this stop, if this will stop at some point? Do you have some sight that you can give us into the future of that?

I can't predict when it will stop; however, it has decreased each quarter. Our decision-making revolves around what makes sense for us to cover economically. We have the necessary data and have mentioned before that we benefit from a selection process that helps us identify which IFAs to retain. While it has continued to decrease, I can't assure you it will stop in a specific number of quarters. It's a daily evaluation for us. We will analyze any proposals we might consider covering, and this will be guided by strong data points to support our decision-making.

The next question is from Carlos from HSBC.

Can you hear me?

Yes.

I have two and they are both related to your equity actually. First, if you could give us some idea about how much you're expecting share-based compensation? There was a significant increase this year during 2021 versus '20. What do you expect for 2022 and 2023 against share-based compensation? And the other question I'm sure you received this all the time, would you consider anticipating or buying back from Itaú, the stake that they are supposed to buy during 2022 to reduce the overhang in the market?

Yes. We have been discussing share-based compensation internally to provide a clearer range, as we want to avoid sell-side analysts predicting a very wide range. The way it works is that when a share-based compensation is issued for any partner, the taxes we need to pay fluctuate each quarter or month, making it a more volatile expense that aligns with share price changes. This expense typically makes up about one-third of our total expenses. We anticipate that this figure will increase from 2021 to 2022, though we can't provide a specific number at this time. It may be more than a 30% increase, but that will depend on the estimated share price each quarter. Regarding the Itaú acquisition, I believe the other question was about the acquisition that the Central Bank has approved, correct?

Yes, it's correct.

Yes, it's going to happen. Right now, we are waiting for the financials to be released. There is a process there. And I believe that in the first quarter, we are going to have these shares being bought by Itaú, remembering that we are talking about here all secondary shares. So no primary shares being sold, which 80% is approximately are from General Atlantic and 20% from XP controle.

And the question is, would you consider buying back from Itaú to reduce the overhang because eventually Itaú will want to dispose the share, would you be willing to put a bid on them?

They need to inform us if they intend to sell, and we can analyze that. However, we still have many investments to make in our company and its growth. We are at a very early stage in various verticals, and even in our core business, we are not yet the market leader. We have a long road ahead. If we have to choose between buying back shares in the short term and retaining sufficient cash to invest in our business, we will prioritize long-term growth over short-term gains because we think like owners focused on the company's future and believe that’s the right approach, especially with the opportunities we see ahead. If we had excess cash, we would consider that scenario, but our business is rapidly growing across different sectors, so we do not have that excess cash. While we have a significant amount of gross cash in the company, it's allocated for our business expenses and various other commitments. Therefore, I don't see that option as viable at this time, given our current balance sheet.

That's a very clear answer. Going back to the first one. So the BRL 700 million that we have this year that should be the base. We should think about the number above that for share-based compensation in 2022.

Yes, I believe so because we always have the partnership meritocracy once a year, typically at the beginning of the second semester. The RSUs are usually released in October. The new shares that were released last year only accounted for a quarter of the year, and now they will have the entire year. Additionally, this year we will see the first issuance of RSUs vesting by December, so yes, probably in December.

November, maybe.

Thank you, Carlos. So we're out of the Q&A. I'm happy that we could answer all of you. The participation was great of the audience and so forth. And thank you, everyone, so much for your interest. I would leave maybe Bruno or Maffra or both of you to finalize the call. But on our part here, thank you very much for the participation. We are fully available for the many follow-up calls that we might have on the next few days.

Now, I can start, and Maffra can finish here. Now I’d just like to thank you very much for the interest, and hope to see you in the next earnings call, and be together in this long-term journey that we have ahead of us. Thank you very much.

Thank you very much, everyone. And as we like to say, we are at the very beginning of our journey here. As I mentioned, we still have very small market shares of revenue in Brazil with two at a very early stage here. And this is our life. We are here for the next 10, 20 years. So I hope to have you guys alongside all the journey, all the way. So thank you very much.